Campaign Finances Augur A Dead Heat in
Congress

M oney can't buy you love or happiness. However, it can buy lots of other things, including a Congressional election. The candidate who raises the most cash prior to Election Day has a big ballot-box advantage, which is why we have been ignoring the pundits and the pollsters and zeroing in on the campaign finance records of House candidates.

Our examination tells us that as of the latest reporting period, which ended July 31, Republicans and Democrats are in a dead heat for control of the House. According to an analysis which gives the advantage to the candidate who has raised the most money, the GOP has 217 seats to 216 for the Democrats. In two remaining races, candidates have raised nearly identical sums. Toss a coin. The outcome hardly will make much of a difference to either party.

What's the implication for investors? The moderates of both parties likely will call the shots, regardless of which party is in control of the House and which presidential candidate ends up in the White House. Lovey-dovey bi-partisanship will be the rule of the day. As for the big issues being debated in the presidential campaign, forget about them! The GOP will be unable to pass a broad-based tax cut or privatize a portion of Social Security. The Democrats won't be able to gain approval for a giant prescription-drug bureaucracy or any other large-scale entitlement program. With the House in gridlock, the surplus will continue to run -- all else being equal, of course.

There are other investment implications.
Fannie Mae
and
Freddie Mac
, the two Congressionally chartered and Big Board-listed mortgage giants, won't be as vulnerable to GOP critics of their marketplace expansion. Defense firms won't enjoy a GOP budget bonanza.

Money is a very good predictor of the outcome of House races. During the last Congressional election, there were 293 contested seats. The candidate with the most money won in all but 15 of those contests, or 95% of the time. In the upsets, 11 Democrats, five of whom were incumbents, beat richer GOP opponents; and four Republicans, one of whom was an incumbent, beat richer Democrats. The GOP retained control of the House 227 to 208.

There are 287 contests in the coming House races. We've included contests in which well-financed incumbents face token challengers with just a few hundred bucks in their campaign kitties.

During the 1997 election there were 21 House races in which both candidates raised over $1 million. Also in 1997, at least one candidate raised $1 million or more in 95 of the races. So far this year there are 10 House races in which both candidates have raised over $1 million. A total of 62 candidates have raised more than $1 million; 35 Democrats and 27 Republicans. The millionaire club is likely to grow considerably larger. We counted 30 candidates who have already raised between $800,000 and $1 million as of the end of July.

E ndangered Senator Rod Grams, the Minnesota Republican who chairs the House Banking Committee's Subcommittee on Securities, tentatively has scheduled a September 19 hearing that is bound to please some big-buck contributors.

Grams is summoning SEC Arthur Levitt to explain a proposed overhaul of auditor-independence rules opposed by three of the Big Five accounting firms. The opposing firms are trying to stall the rulemaking process and they've already gotten influential congressmen and senators in both parties to write nasty letters to Levitt on their behalf calling for a postponement of the rulemaking until next year. If Republican George W. Bush wins the presidential race, Levitt would be replaced as SEC chairman.

Grams signed one of the letters along with Senate Banking Committee Chairman Phil Gramm and eight other Democrat and Republican Senators.

Grams' would be the first congressional hearing but certainly not the last. The House Commerce Committee, which is chaired by Rep. Tom Bliley of Virginia, also is considering one.

Levitt is bothered by accountants who sell lucrative consulting services to companies while at the same time serving as their "independent" auditors. He sees a temptation for the auditors to be more permissive than they might otherwise be, so as not to jeopardize the consulting arrangements. In fact, he suspects that this sort of sensitivity has contributed to a record number of earnings restatements by public companies over these past three years.

So he wants a rule that precludes auditors from hawking other services to audit clients. The SEC was empowered by Congress to oversee the accounting industry.

Grams' top contributors include both Deloitte & Touche and KPMG, who both oppose Levitt's auditor-independence proposal. As of July 31, the firms had given Grams about $10,000 each, and have contributed heavily to the GOP generally. KPMG has given the National Republican Congressional Committee $100,000. Deloitte & Touche has given GOP state committees about $148,000 since March. Arthur Andersen also opposes the measure.

Polls show that Grams, a former television reporter, is in trouble with the voters back home. Both Democrats running in the September 12 primary are more popular than the Senator, according to political polls. Undoubtedly Grams will need to spend a great deal of money to survive an election challenge from either of the Democrats, who are both multimillionaires.

Grams already has raised $3.8 million and has spent $2.9 million, leaving him with a little over $1 million in his war chest. His likely opponent is Democrat Mark Dayton, heir to a department-store fortune. Dayton spent $2.5 million of his own money this summer for TV ads for the primary contest alone. There's plenty more where that came from. Trial lawyer Mike Ciresi, Dayton's most serious opponent, raised $3.5 million and spent $1.8 million. He has $1.6 million left.

Levitt is holding a hearing of his own on the auditor-independence issue at Pace University in New York on September 13. Several Fortune 500 CEOs are expected to endorse the proposal. It's clear that the public record the SEC chairman is building will be damn-the-Congress in the event of a financial scandal triggered by haphazard auditing.

D rinking water will be back in the news later this month. The House Commerce Subcommittee on Health and the Environment has scheduled a hearing on the Clean Water Act for September 19.

T hree months before the general elections, bipartisanship is an abstract concept here in the Capitol. President Clinton and the Democratic leadership of Congress will demonstrate this next Tuesday when they come out swinging as lawmakers return from their summer recess. Clinton, House Minority Leader Richard Gephardt of Missouri and Senate Minority leader Tom Daschle of South Dakota will hold a press event and call on Congress for progress on "key priorities for America," which is their euphemism for the Democratic Party's legislative agenda.

Congress is set to vote on 11 major appropriations bills, some of which are needed to keep the government running. Republican bills contain $24 billion less than the President wants for domestic and foreign programs. The President also wants more funds for schools and new laws for patient protection and gun safety that are opposed by the GOP.

Senate Majority Leader Trent Lott of Mississippi already is accusing Clinton of foot-dragging and trying to engineer a government shutdown. The Republicans want fast action on appropriations bills so they can hit the campaign trail to defend their majorities in the House and the Senate.

"Lott needs an excuse because he's behind in his work again on appropriations, " says Clinton spokesman Joe Lockhart. "September is about the people's interests. Congress spent the first eight months of the year on special interests," he chides.

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